Mass. Proposes Background Checks For Advisors
March 26, 2013 by Kenneth Corbin
Massachusetts-based financial advisors could soon have to submit to a criminal background check under a proposed reform to the registration process in that state.
Securities regulators in theBay State are asking for comments from the public on an amendment to the application process that would require investment advisor representatives (IARs) to submit a Criminal Offender Record Information (CORI) Acknowledgement Form with their registration application, authorizing the state to verify the criminal disclosures that applicants are to include with the U-4 forms filed with the Massachusetts Securities Division.
“The Division believes that it is in the public interest and for the protection of investors to conduct criminal background checks of those individuals seeking IAR registration in order to ensure that the applicant is not subject to a statutory disqualification and has truthfully and accurately disclosed any criminal background required on Form U-4,”Massachusetts regulators said in their request for comment.
The proposedMassachusetts rules come as states are taking on a larger role in overseeing financial advisors. As a general matter, advisors with less than$100 million in assets under management must now register with state securities regulators, rather than theU.S. Securities and Exchange Commission. Previously, the threshold for federal registration had been set at$25 million.
The Massachusetts CORI Acknowledgement Form, which advisor applicants would have to have notarized, would give state securities regulators with a tool to catch any omissions on the U-4 forms that advisors are required to file. Those applications ask advisors to list all felony convictions and certain misdemeanors, irrespective of when the case was resolved.Massachusetts regulators reserve the right to deny an application if the securities secretary “finds that the order is in the public interest and that the applicant has been convicted within the past 10 years of any misdemeanor involving a security or any aspect of the securities business, or any felony.”
The Massachusetts Securities Division recently won access to the state’s iCORI electronic-database system, giving it the authorization to conduct the proposed background checks.
In its request for comment, the Securities Division is seeking information from advisors about the potential costs and other logistical implications, including privacy concerns, of adding the CORI form to the application process.
The regulations that Massachusetts is proposing would also entail minor modifications to filing process for Form ADV, the document that advisors submit for registration with the SEC and relevant state authorities. Noting that “the Form ADV has changed significantly over time,” the proposed amendment to the filing process would strip out specific references to enumerated items on the form that have been modified, referring instead generally to the form’s instructions in an effort to “more closely align state requirements with national standards.”
In a research note, the consulting firm Cipperman Compliance Services offered a blunt assessment of the prospects for the proposedMassachusetts regulations to spill over into other states.
“We expect thatMassachusetts will require these criminal background checks, and many other states will follow with similar requirements,” the firm said.
The Massachusetts Securities Division is accepting written comments on the proposal for advisor background checks through May 15. That same day, the division has scheduled a public hearing where interested parties are invited to make oral presentations on the proposed changes.
